The North Sea stands out as one of the world’s most expensive places to operate. Most companies are now operating at a loss. A domino effect may mean that North Sea production will dwindle rapidly in a few years.
Sometimes one company perfectly captures the course of an industry. For the North Sea, that company is Fairfield Energy. Launched a decade ago with $200m from a clutch of savvy investors, led by American buyout firm Warburg Pincus, Fairfield’s plan was to scoop up old oil fields cast off by the industry giants and breathe new life into them.
In 2012 Riverstone, the energy specialist then run by Lord Browne of Madingley, ploughed in another $150m. The renowned former BP boss even joined the board, endorsing Fairfield’s strategy of squeezing the last drops from decades-old platforms whose output had slowed to a trickle.
Yet forces were gathering to dash the company’s plans. The offshore industry’s operating costs doubled in just five years as contractors used a buoyant crude price to ratchet up day rates for drilling rigs and boats. Unions won better salaries and shorter working hours.
The 60% drop in the oil price since last summer to $45 a barrel was the final nail in the coffin.
Rather than styling itself as a saviour of Britain’s oil industry, Fairfield has decided there is more money to be had from feasting on its carcass. Three months ago it took the first steps to transforming itself into a decommissioning specialist. Its old fields have been closed or put up for sale, and it has begun hiring experts to dismantle platforms.
David Peattie, the former BP high-flyer who was parachuted in just two years ago, will leave after a buyer is found for Fairfield’s one reservoir that is producing oil. Browne stepped down from the board this year and at the same time left Riverstone.
A Fairfield source said: “We were set up to put off decommissioning for 10 to 20 years. Now we’re doing the opposite. It’s quite amazing really.”
Fairfield’s transformation from saviour to undertaker is a stark example of the forces battering the industry. The North Sea was once the biggest single contributor to the exchequer, but this year it will hand over little more than £1bn, compared with more than £11.5bn just three years ago, according to the specialist adviser Hannon Westwood.
The Office for Budget Responsibility reckons that the Treasury’s take between 2020 and 2040 will dwindle to a total of just £2bn, a 94% reduction on previous forecasts.
The day when the North Sea goes from asset to liability is not as far away as one might think, not least because the taxpayer is on the hook for roughly 60% of the estimated £30bn decommissioning bill.
Indeed, next year a ship equipped with the world’s largest scissors will chop the top off the first of four platforms in the Brent field, about 110 miles east of the Shetland Islands. The reservoir, after which Britain’s benchmark crude is named, pumped an astonishing 4bn barrels before it was shut down in 2011. It will be the North Sea’s biggest decommissioning project yet. [...]
In the face of that collapse, the North Sea, where rig cooks can bring home £50,000 a year, stands out as one of the world’s most expensive places to operate. Most companies are now operating at a loss.
Only nine of the 120 companies in the North Sea are profitable and, thus, pay tax, according to Ian Norbury at Hannon Westwood. This will get worse.
So far this year only two new projects have been approved, against seven last year and ten in 2013. Exploration is on track to hit a record low, with as few as eight wells planned this year. “The cupboard is bare in terms of planned wells,” said Norbury.
Half a century after the founding of the North Sea industry, its biggest fields are mostly dried up. What remains is the crumbs that are not worth the time or investment of the biggest players.